Dubai Boom Goes Bust

Last week we heard that Dubai World—the investment and holding portion of the emirate of Dubai—is on the edge of defaulting on billions worth of debt. Because Dubai doesn’t have much oil or gas of its own, its plan was to turn it’s small land mass into a tourist and business destination: the Las Vegas of the Arab world, sans gambling.

It’s no surprise that they are facing the same fate as Las Vegas. When times are tough, people don’t go on vacation. Add to that leveraged real estate in an area that doesn’t naturally have a large population and the results are predictable. They have built indoor snow skiing facilities in the desert. They didn’t have enough coast line, so they build islands coming up from the shallow sea. Very cool things, but very risky ventures.

If this isn’t that much money in relation to other busts, and the U.A.E. can backstop any major fallout, why should markets get jittery? The concern when word spread was that Dubai World was in trouble was that it would take Dubai, the emirate, down with it. And if that happened, what shoe would drop next?

The other countries that are in deep debut include Greece, Hungary, Bulgaria, and Romania, all of which have debt to GDP way above international norms with some approaching debt to GDP of 100%. Other countries have debt issues such as Iceland and Greece. Those that invest in emerging market debt all know this. They didn’t panic. Not yet anyway. But if they did, a domino effect similar to the Asian currency crisis could emerge. Who knows what large hedge funds hold and how much leverage they are using?

Abu Dhabi, basically Dubai’s rich uncle, stepped up over the weekend to reduce fear with talk of unity across the United Arab Emirates. So things are back under control… for now.